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Moving From a Solo 401(k) to an Employee Plan
Hiring your first employees? Once someone becomes eligible, a solo 401(k) no longer works. Here’s how to move to a full plan without losing your savings power.
Keep your contributions. Add your team the right way.
Grow Without the Headache
A free plan transition review for your business
What happens to my solo 401(k) when I hire employees?
A solo 401(k) is only for owners and their spouses. Once an employee meets your plan’s eligibility rules, the plan has to cover them, and most solo 401(k) providers can’t administer a plan with employees.
The good news: you don’t have to give up your contribution levels. A properly designed employee 401(k), with profit sharing and, if it fits, a cash balance plan, can keep most of the contributions with you while giving staff a fair benefit.
When do you need to switch?
- Before an employee becomes eligible, not when you hire them. Plans can generally require age 21 and one year of service with 1,000 hours.
- Long-term part-time employees who work 500 or more hours in two consecutive years must be allowed to make 401(k) deferrals.
- Your spouse doesn’t count. A spouse working in the business can stay in a solo plan.
Continuing to fund a solo plan after an employee becomes eligible can cause the plan to fail IRS coverage rules, which is costly to fix.
Your options
- Convert the solo plan. Amend and restate it as a full 401(k), then move it to a provider that supports employees.
- Start a new plan and merge or roll the solo 401(k) assets into it.
- Add a safe harbor design to avoid annual testing headaches, or a custom design to maximize owner contributions.
- Add a cash balance plan if you want larger deductions. See adding a defined benefit plan.
How We Build Your Plan
From first call to first contribution, we handle the design, the math, and the compliance.
1
Review Your Business
We look at your income, age, staff census, and current plan to see what’s possible.
Design Your Stack
We layer your 401(k), profit sharing, and cash balance plan around your tax goals.
See the Numbers First
You get a clear illustration of your deduction, your savings, and your staff cost before you commit.
We Run It for You
Plan documents, annual actuarial work, testing, and filings, handled every year.
What changes when you add employees
| Solo 401(k) | Employee 401(k) | |
|---|---|---|
| Who can join | Owners and spouses | All eligible employees |
| Testing | None | Nondiscrimination testing, or a safe harbor design |
| Annual filing | Form 5500-EZ (over $250,000 in assets) | Form 5500 or 5500-SF |
| Administration | Minimal | A TPA handles testing, filings, and compliance |
| Payroll | Often manual | Integrated with payroll |
We’ll also tell you which recordkeepers can work with how you’re invested today, so the move is as simple as possible.
Timing and deadlines
- 401(k) salary deferrals can only start after the new plan is in place, so set it up before your employee becomes eligible.
- A new safe harbor 401(k) generally needs to be in place by October 1 to apply for that year.
- Profit sharing and cash balance plans can generally be adopted as late as your business tax return due date, including extensions, and still count for the prior year.
- Your solo 401(k) filing: a final Form 5500-EZ may be due if the old plan is terminated or merged.
We map out the timeline with you so nothing falls through the cracks.
Michael, a successful business owner with no employees, wanted to maximize his retirement savings while minimizing taxes.
Through a custom-designed retirement plan stack, he and his wife were able to contribute over $575,000 across multiple plans in a single year.
This strategy not only helped secure their financial future but also generated over $222,000 in immediate tax savings, significantly increasing their cash flow and long-term wealth-building potential!
James runs a construction company with high employee turnover and wanted a way to protect cash flow while maximizing retirement contributions.
Through a custom 401(k) and profit-sharing plan design, we used strategic eligibility and vesting schedules to limit costs from short-term employees while allowing ownership to maximize contributions.
This strategy protected company assets, controlled expenses, and helped James build significant retirement wealth.
Eileen, a small business owner, needed a low-cost retirement plan that would meet state mandate requirements while helping her recruit and retain high-quality employees.
Eileen used a customized 401(k) solution focused on minimizing expenses, giving Eileen a competitive edge in hiring without pulling resources away from reinvesting in her growing business.
By using tax credits, her design allowed her to stay compliant, attract top talent, and keep her financial priorities aligned.
*These are hypothetical clients with hypothetical situations and plan designs.
Why business owners work with Life, Inc.
- Everything under one roof. Plan design and administration, investment advisory, and insurance strategies, all from one team. No juggling three different firms.
- A credentialed, in-house team. Our plan specialists hold industry designations including QKA, QPA, and AIF, and handle your plan year round.
- Independent and unbiased. We work with the recordkeeper that fits your business and don’t take kickbacks from any of them.
- Custom, not cookie-cutter. Every plan is designed around the owners’ tax goals first, then built to pass IRS testing.
- Nationwide. We design and administer plans for businesses across the country.
Learn more: The Retirement Plan Stack | Adding a Defined Benefit Plan | S Corp Owners | Group Retirement Plans | About Us
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Our Most
Asked Questions
Can I keep my solo 401(k) after I hire an employee?
Only until that employee becomes eligible under the plan’s rules. After that, the plan must cover them, so it needs to become a full 401(k) with a provider that supports employees.
How long can I wait before covering a new employee?
A 401(k) can generally require employees to be age 21 and complete one year of service with 1,000 hours. Long-term part-time employees with 500+ hours in two consecutive years must be allowed to defer.
Can I keep my contribution levels with employees?
Often yes. A custom design with profit sharing, and possibly a cash balance plan, can keep most contributions with the owners while giving staff a fair benefit.
Does my spouse count as an employee for a solo 401(k)?
No. A spouse who works in the business can participate in a solo 401(k) without disqualifying it.
What happens if I keep funding a solo plan after an employee becomes eligible?
The plan can fail IRS coverage rules, which can require corrective contributions for the excluded employee and fees to fix. It’s much cheaper to transition before eligibility.
How long does the transition take?
Usually a few weeks. We review your current plan, design the new one, coordinate the asset move, and set up payroll integration.
Can I keep my investments at Fidelity or Schwab when I add employees?
Sometimes. Many solo 401(k) programs can’t support employees, but some recordkeepers can work with your preferred custodian or investments. We’ll show you which options fit.
Some Of Our Trusted Partners:
Life, Inc. Retirement Services does not offer tax advice. Please always consult your tax professional about your eligibility for tax credits.
Life, Inc. Retirement Services is a Registered Investment Advisory Firm of the state of Ohio and licensed in Florida and Maryland. All emails and communication are meant to be informative and educational and should not be considered a sale of security until proper notification and disclosures are given.